Equally Weighted ETFs
October 12th at 12:00pm by Tom Lydon
Some exchange traded funds (ETFs) are being rolled out based upon equal weight rather than market capitalization. XShares Advisors recently launched a set of REIT ETFs that are equal weighted, and Rydex also has done so in recent years with the Rydex S&P Equal Weight (RSP).
Market-cap weighting is the traditional method for the S&P 500, and most ETFs are still weighted in this way. Jesse Emspak for Investor’s Business Daily says with equal weighting, a 1% rise or fall in one security’s price has the same impact on the index’s performance as another. This is not the case for market cap-weighted indexes. Because all stocks do not perform the same, re-balancing is needed periodically to put the weightings back in sync. Equal-weighted indexes are likely to outperform when small stocks do better than larger ones. This also seems to work in favor for single sector exposure.
Read the disclosure, as Tom Lydon is a board member of Rydex Investments.
